Mike Gleason: It is my privilege now to welcome back David Smith, Senior Analyst at The Morgan Report and regular contributor to MoneyMetals.com. David, thanks for joining us again. How've you been sir?

David Smith: Very good Mike, it's great to be back.

Mike Gleason: Well, before we get into other topics such as the Silver Institute's latest report on the silver market and also the article you wrote for us recently on digital currencies, crypto-currencies, and so forth, I first want to have you set the stage here on where we are and where we've been in the metals markets. The year got off to a good start in gold and silver and then in April, we saw the typical smack down on the futures markets. Silver, for instance, gave back nearly all of its gains during an unprecedented 16-day losing streak and fell about 12% over that period.

Now here we are talking on Wednesday afternoon. We've seen the metals bounce back off their deeply oversold levels. All of this back and forth is obviously very frustrating for metals investors, David, and it's getting quite tiresome to see these bullion banks constantly pushing around the price and ultimately capping it on the upside. So, is there any end in sight here, and how effective will these manipulation schemes continue to be because you've got to think that they will come to an end here at some point, right?

David Smith: Well, yeah, and I share the view of people who are pretty worn out by this. Like David Morgan likes to say, the declines will either wear you out or scare you out. So, it's understandable because people think it's just going to be more of the same as far as the eye can see. But I do believe that there are a couple of very important factors that are starting to make their presence felt in the market, or will be in the very near future, which are going to start really eroding – and fairly significantly – the ability of the banks and the central governments and the Federal Reserve and the leasing programs and all this to cap the price on the metals way below where they should be if we truly had a system where price discovery operated as it's supposed to and the price of the metals will be much higher.

I think as we see this falling away, this ability to manage things so to speak, we're going to see stronger and more sustained upward pricing on the metals. Not so much the big up and down valleys and peaks that we've seen but more of a fairly substantial uptrend where the corrections are relatively minor and shorter-lived and the move to the upside is more enduring and more powerful. That's the promise that these changes hold out to our long-suffering investors and those people who either would like to add more physical metal or are simply asking themselves, "Should I get involved initially?"

Mike Gleason: It isn't much fun being a bullion investor these days. We've seen significantly more clients selling metal in recent months than we did before. There are, of course, plenty of legitimate reasons for individuals to sell metal and raise cash. However, some are simply getting tired of getting punished for being right. They see the dollar as terribly flawed, and it is. They expect consequences for never-ending federal deficits and the explosion in debt. They see the financial system as a house of cards built by crooked bankers, but that house just keeps standing, and the market rigging continues as regulators turn a blind eye. The dollar seems to be holding its own despite the fact that the full faith and credit of the U.S. government isn't what it once was.

It is a special kind of frustration to watch as the number of reasons to own bullion keep growing while none of these fundamentals seem to show up in the price. What would you say to the tired and frustrated metals investors?

David Smith: First of all, just within the last few days, the U.S. dollar has been making a very sharp drop. It's down about 160 basis points, and it could be the bottom here for a while, but if it keeps on going, we could see much lower prices, which is traditionally very supportive of higher bullion prices. Also, gold and silver have been strong recently. The mining stocks have been really trashed for the last several months, but the point is, once the metal prices firm up and turn around and these things start receding in the rear-view mirror, the market being a looking-forward mechanism, will anticipate this before you or I or the average person on the street can put our finger on it and say, "Yeah, the trend has changed."

What keeps me optimistic on this is first of all, there have never been more elements, which none of us can say, "Okay, this is going to cause that and when." But there's never been more elements which lend support to the idea of the wisdom of holding gold and silver physically as an insurance policy. It's an asymmetric trade. In other words, a person doesn't have to put half of their net worth into the metals. They can put in 5-10% or if they're really bullish, 10 or 15 or 20%, but even a relatively small amount dollar-wise in your possession is what we call an asymmetric trade. In other words, if even part of what we think has the potential to happen and may happen in the near future takes place, you will have a return of several times what you put in. So a fairly small commitment can give you a fairly substantial coverage to cover and protect a lot of your other asset classes.

I can't think of any other asset class that you could say that about now. Certainly not the stock market. Certainly not real estate. Virtually all of these asset classes and then bonds, which have been in the 30-year bull market. These things don't have anything like the upside potential for the relatively small amount of commitment that we see in the precious metals today.

Mike Gleason: Last week the Silver Institute released the World Silver Survey for 2017 and perhaps the most note-worth piece of information in there was that silver supply, for the first time in 14 years, actually declined year-over-year. It also marked the 4th year in a row where we've been in a deficit. Talk about some of this data and then also give us your thoughts on when we might finally see these bullish supply/demand fundamentals for silver finally show up in the price, David.

David Smith: That's very interesting, that report that you referenced about silver supply. You know, Steve St. Angelo did a report fairly recently where he shows that – and I could be wrong on this -- I think it was 1987 was the all-time high for silver projections worldwide, but as you said, this survey shows that it declined last year -- it had been increasing for the first time in a number of years. Also, there have been some really sharp drop-offs even this year in Mexico and in Chile. We don't know if those are one-off drops in silver production. It's fairly substantial. Anywhere from 15 to 35% on a month-to-month basis, and whether that's due to lower copper prices or other things, but I think really it's just getting more difficult, if you look at the global situation, to dig a lot of quality silver and gold out of the ground in ways that represent profit to the miners and that represent consistency and predictability for the supply chain.

I think more and more for all sorts of reasons, the supply of both of these metals are going to become more problematic. And if this survey last week holds up on silver, it wouldn't surprise me to see the same thing next year with a bigger drop. I think the days of easy production of gold and silver and loading up the boat and being able to supply everybody, all comers, at a good price, I think that's really starting to change. By the time the average person in the street figures that out and feels comfortable with it, prices are going to be a lot higher and supply is going to be more problematic.

I'd like to say one more thing on this, Mike. When it's easy to do something in terms of an investment, it's not always the best time to do it. In fact, it's usually the worst time. If you're having a hard time doing it now and you've looked through things, you agree with the issues but it's still hard, it's probably the right time to either start accumulating or add to it. Because if you wait until it feels good, the market will have discounted a lot of that, and you will pay much higher prices for what you do get, assuming that supply is even there in the quantities that you would like.

Mike Gleason: Well put. Certainly the contrarian mindset often does win out when it comes to the world of investing. Now one more thing on that survey, I know solar continues to be a big source of silver demand. The report highlighted that. What are the prospects there, David, because the amount of silver being used in solar is really starting to move the needle, isn't it?

David Smith: It is, and even though they're getting the silver panels (to the point) where they use less silver than they needed to before, the number of panels being produced continues to grow, in some cases almost exponentially. They're getting to the price point where just about everybody can afford silver panels. I think Tesla's coming out with one now that looks like a regular terracotta roofing tile. So, they're going to become a commodity, but those commodities are going to take a lot of silver in order to meet all those needs. That's just one area where you have a lot of growth going on. We've seen a lot of growth in the use of gold, for example, in medical procedures to target cancer cells by delivering a drug right to, or the chemo in that case, right to where the cell is, kill it, but not the good cells. They're using nanotechnology on this, so on an individual basis, it's not a big deal, but when you start realizing that that could take a huge percentage of the cancer dealing industry over the next 5-10 years or so, suddenly it becomes a significant amount and is essentially a new use for gold, which had not been even on the charts before.

Mike Gleason: Obviously there's not a never-ending supply, as we're coming to find out. So, it certainly could be very interesting if we get some sort of new application like that that's going to take up a lot of demand. Now, you recently wrote an article for MoneyMetals.com about the blockchain and Bitcoin, and you highlighted how the ascent of these crypto-currencies -- Bitcoin of course being the main one there -- and how the rise in prominence is actually going to be a good thing for gold and silver. Give us your thoughts there, David.

David Smith: It has a real potential. Whenever people here the blockchain, they think of blockchain hype and Bitcoin. In my article, I barely mention Bitcoin in passing. The reason for that is not because Bitcoin isn't important in the cryptocurrency space – in fact over half of these digital currencies’ volume traded right now is Bitcoin even though there are several hundred other little currencies, most of which will probably disappear – but what intrigued me was that there are efforts made now, and the most interesting effort that I've seen so far is in India, where they are experimenting with the ability for people to buy metal online, digital gold now probably silver soon to follow, in the local currency. I think that's where, if that works, that would be a breakout moment for people all over in different areas of the world because now a lot of the times that you buy something online in the cryptocurrency space, you have to take your dollars or your pesos or whatever and convert those into Bitcoin and then purchase the product.

But now they're able to do this in India with the rupee. In addition, it’s the size of the purchase. You can buy as little as one rupee of gold, and there is 65 rupees to the dollar, so in other words, you could buy a 2-cent purchase of gold digitally with the promise that it would be stored in a Swiss warehouse where you could take delivery of it if you wanted, locally. You could store it there. You could buy it and sell it digitally. So it’s the early days on this thing, but it bears watching, and I think it's important for our readers to understand some of these experiments that are going on and understand that it will be quite a while before the need to buy physical metals as we've done in the past becomes obviated by digital metals.

Maybe that will never happen, but the point is still that it will introduce many new people to the market who probably never owned the metals before, never owned gold before, and it will also encourage those people who are holders – and we know that India and China and other countries in Asia historically have accumulated, and continue to do so, massive amounts of precious metals as a form of wealth and for jewelry and other things – they continue to add to their stash. So, it should increase the pool of buyers and the demand factor. That, at some point, is going to collide with the very thing that you brought up earlier, which is the questionable ability of the mining sector to continue supplying gold and silver in the quantities that they've been able to do in the past. That's going to become more problematic for all sorts of reasons as the months and years go by, much more so.

Mike Gleason: Even though we're talking about digital, I guess in some sense here, if we're talking about an investment that is backed by the physical metal somewhere, obviously there is the demand for that physical product, even if those citizens of India or wherever they are aren’t taking delivery of that gold initially. If the fund still owns the gold, they have to have it somewhere, so there is still that demand for the physical product, so it certainly can add to that.

David Smith: Exactly. The only difference is instead of going into a location and handing your money, your currency over and walking out with the gold in your pocket, they do it digitally, but the gold still exists. That's still removed from the supply basis, and if it's honorably kept, it’s a promise… and that's what any kind of currency – which gold and silver are, they're money – it’s based upon the promise that it's there. If I buy it, that I can take a delivery on it whenever I want, and it will be the stated purity and the amount. And if that promise is honored, the more and more, people will come to be comfortable with the idea of buying metal, whether it's digitally or in person, and there will be, in a way, almost kind of doubling back into the gold standard of 100 years ago, only doing it with an online component versus what we had before of the physical property where you had your currency, which is redeemable on demand. As you remember the Gold Certificates and the Silver Certificates where you could – there was a time, probably before many of us were born – but you could walk into an American bank and demand X amount of gold or X amount of silver for your paper currency. We can no longer do that.

Mike Gleason: Talk about the miners here for a minute, David, because you obviously follow the space very closely. Now, part of the recent selloff in the futures market was due in part to the GDXJ selling off some shares of some of the thinly-traded stocks the index owned, which hurt the sector as they liquidated shares of those companies. But what is the situation with the miners? Anything noteworthy there in terms of how the industry is doing after this continual two steps forward, two steps back price action that we keep getting in the futures markets?

David Smith: First of all, the better companies in the industry are cashed up well. They've lowered their debt. They've lowered their all-in sustainable cost that Chris Marchese talked about in The Morgan Report, which is kind of the gold standard so to speak, pun intended, for evaluating the mining company. What is the cost all-in to produce that ounce of gold and silver rather than some other metric or using two elements to define it? That gives you and me and investors a pretty clear idea of what it's costing these companies, and as Adam Hamilton has pointed out, the primary gold producers today are making anywhere from $275 to $350 an ounce, beyond all-in sustainable costs. They're making money, and the process is looking like they're going to continue to be able to do that.

What you mentioned earlier about the GDXJ, those shares are being sold off because by law, the ETF cannot hold more than, I think, 19.9%. It has to be a little under 20% of the share float of a stock company by law. That's the same thing with big investors or other companies that want to do a buyout. This has grown so popular that they were bumping up against these limits, and they had to sell a lot of these stocks. Now, some of these stocks won't come back into the listing that they have and other new ones will be added.

That's brought a lot of turmoil, and a lot of these stocks that you see that have declined sharply, it has nothing to do with the fact that they're no longer profitable. They're making just as much money as they were before, but because they were sold out, some of these take 14, 15 days of selling to get out of the index, and other people that don't understand what's going on, they say, "Oh gee, the price is down 25%. I've got to get out." They panic, and of course that's going to create a buying opportunity for people that really understand what's going on. As they reinstate these stocks into the GDXJ and add new ones, that will get fresh finances back into the system. So that is not something that people should be worried about.

However, it occurred during the time of soft metal prices in the mining shares in general, so that was just added to the short-term and intermediate-term discomfort.

Mike Gleason: Yeah, and as we touched on earlier, 16-day losing streak there in silver, just an unprecedented sell-off there, totally oversold and now looks like it's finally reversed itself.

And finally, as we begin to wrap up here, are you focusing on the same sort of price targets for gold and silver that you'd mentioned when we had you back on last in January? For instance, are you still looking at $21-$22 as a key level in silver in terms of a resistance level that we really need to see taken out?

David Smith: That's really true, and as David Morgan of The Morgan Report has kept his focus in that area. His ideas haven't changed about where we might end up this year and where we need to be, but for sure, to get rid of all the doubting Thomases, if you see $26 silver penetrated and base built above that, and if you see $1,550 gold, then you can say, "Boy, as far as we can tell, it's never 100% but the coast is pretty much clear." And the point is if you wait for that point, a lot of profit potential for you has been given up, and so by definition, right now, we have information risk because the price is relatively low. At $1,550 gold and at $26 (silver), we have price risk because gold will be a couple hundred higher than it is now per ounce. And silver will be, rather than about $17 an ounce, it will be $9-$10 an ounce higher, that's a lot of price risk that exists then that does not exist now.

Again, going against your emotions, buying on a regular basis, buying within the limits of what you want to accomplish with your outlook and things like that and your ability for risk makes a lot of sense now, rather than waiting until it's all clear because when it's all clear, it's a lot less potentially profitable than if you at least started your stake now and scaled up or scaled down.

Mike Gleason: Very well-put. Right now, we're looking at $18.50 on silver is the overhead resistance level. We seem like we've bumped into that a couple times now and fallen back down, so I guess that's the first overhead resistance level and then $21-$22 certainly looks like the only thing that's going to separate silver from $18.50 to $26. It could get interesting if we finally see things moved to the upside. Obviously, there's some work that needs to be done here, technically, for the metals.

Well, David, thanks so much for sharing your insights and your wisdom with us once again. I appreciate your time and your comments as always. Continued success with the book Second Chance, and I hope you have a great weekend. I look forward to catching up with you again real soon.

David Smith: Very good, Mike. It's been great talking to you, and I really enjoy writing to your audience. We have a lot of people get on there and put a comment and I try to answer every one of them. The idea of principled exchange of information and point-counterpoint, and I think we have a real good demographic in the people that do business with Money Metals.

Mike Gleason: We certainly appreciate all the work you're doing. It's great stuff. If people haven't checked it out, definitely urge you to take a look at David Smith's articles. He writes them regularly for us, and you won't be disappointed.

Well that will do it for this week. Thanks for again to David Smith, Senior Analyst at The Morgan Report and regular columnist for MoneyMetals.com and co-author, along with David Morgan, of the book Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shockwave, a book which is available at MoneyMetals.com and Amazon and others places where books are sold. Be sure to pick up a copy today.

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.

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